The $100bn dollar question

Companies in the UK have been at it for years… running off books of business and freeing up capital for insurance and reinsurance companies. Now, the opening up of the legacy market via new Rhode Island legislation is expected to allow insurance companies on the other side of the Atlantic to do the same.

For those of you who don’t know, the recently approved Rhode Island laws mean that for the first time in the state, insurers and reinsurers will be able to cede run-off commercial books with court-sanctioned finality. In March ProTucket, a subsidiary of Pro Global Insurance Solutions, became the first company to receive a licence to provide legacy transfer services in the state.

Many said that the US did not have the stomach to enact the legislation, but the tide of capital efficiency is a hard one to stem. The market needed this reform and Pro has made sure that it has been backing it all the way, not only supporting it, but also racing to become the first company to be licensed in the state.

There are still challenges ahead – this legislation and our licence are just stage one. But getting this far is monumental for the US insurance market, and we feel optimistic that we are clearing the hurdles one by one and can see the finish line.

Facultative liabilities

Rhode Island’s Regulation 68 is a major game-changer for the legacy sector. We think that the pain of its birth is worth it, as it will fuel demand for a new market by unlocking billions of dollars of legacy liabilities in both facultative and treaty reinsurance in the US.

We estimate there is $100bn of business currently locked away. Opening this treasure trove will create a vibrant and significant run-off market in the US – in the same way that Part VII of the Financial Services and Markets Act 2000 bought full legal and financial finality to the transferring insurer in the UK.

As a licensed carrier in the Ocean State, ProTucket can now shepherd the work of setting up protected cells and obtaining required approvals for such transfers. This in turn will free up reserve capital by giving cedants legal finality with respect to legacy liabilities shifted off their books.

We actually think our estimate of $100bn in US books is conservative as the legislation will release trapped capital and potentially improve the capital efficiency of the whole of the US insurance industry.

ProTucket’s remit will be business above $50mn or $100mn of liabilities in Europe (including the UK), the US and South America. While the law does not allow us to transact workers’ compensation or personal lines of any kind, we can accommodate all long-tail lines of commercial insurance and reinsurance.

Under the state’s rules, the entity taking on the legacy book must initiate the transaction and it must receive court approval. The first step for Pro will be to identify a suitable portfolio for transfer. Then we need to have discussions with the relevant regulators.

Rhode Island has made it clear that none of these transfers will happen unless all the policyholders come out as well-off or better-off than they were before.

We fully support the need for a neutral or positive impact on the policyholders, therefore the portfolios these liabilities are transferring into must be highly solvent. Under the regulation, the portfolio assets must equal the liabilities – Rhode Island was clear that it would not become a dumping ground for bad business or insolvencies.

Cautious approach

The regulators, as they are the world over, are being cautious about the first portfolio to be transferred. All eyes are on us to make a success of this and the regulators are open for dialogue.

Once we get past this stage, the next will be to make relevant filings. It may sound simple, but there are still a lot of challenges to get through the next steps. At present, we are close to the stage of talking to regulators, and we are hopeful that by the end of the year we will have the finish line of portfolio transfer in sight.

The challenge will be to get the first transaction over the line, the process tested, and then we expect the floodgates to open. Everyone wants to see the first deal succeed.

There are people in the market who doubted that the legal and operational complexities of US run-off could be overcome. But capital efficiency is central to a healthy market and you cannot hold back what the market needs. We have backed the legislation all the way and in doing so have positioned ourselves as a leader in facilitating the establishment of a run-off market in the US.

Legacy business has gone from something that was talked about theoretically to an actuality.

The confidence in a transaction happening soon is no longer part of wide-eyed optimism, but a reality based on conversations with regulators, insurers, reinsurers, partners, service providers and reinsurance brokers. They are all willing us to succeed.